Monday, March 25, 2013

Its results for the first half of FY2013 financial year (1HFY2013, from June 2012 to Dec 2012) posted a pre tax profit and net profit both grew by 21% from rm6.7 million to rm8.1 million in the quarter. Revenue for the quarter rose by 13.1% from rm16.9 million to rm19.2 million.

Market observers expect stronger earnings in 2HFY2013 (Jan 2013 to June 2013) which is seasonally much stronger and traditionally contributing about 50% more than 1H especially for the Road Transport Department business.

The demand for new driving licenses generally increases in the second half of MYEG's financial year due to the long school holidays after the government exams as most 16 to 20 year olds obtain their driving licenses between Jan and June.

Its prospects remain bright due to its business model, defensive qualities and scope for earnings growth through new business opportunities and services.

The company's earnings are poised to accelerate, spurred by the introduction of new JPJ and immigration related services while the customs tax monitoring service will be the wildcard over the longer term.

The company's services are seeing increasing market share and customer experience. The underlying market for its range of services is large, with recurring demand, supported by the growing popularity of online services.

Its near term earnings will continue to be driven by its JPJ services, namely road tax renewal and insurance premiums, while the introduction of new services, such as the online vehicle registration service, will spur growth.

These services are supported by the large number of vehicles and drivers and high transactional frequency.

The Dec quarter is traditionally the weakest in terms of road tax registration, as many buyers tried to defer their car purchases until the following year to obtain a higher resale value for their vehicles.

In Dec 2011, MYEG launched the first phase of its online vehicle ownership transfer service, comprising the temporary transfer ownership service. In Oct 2012 the service was upgraded to a full online vehicle ownership transfer system, which covers all sale and registration of second hand vehicles. More meaningful contribution is expected in the coming quarters as more people become aware of the service.

The potential market is around one million transfers annually for used cars making this a potential rm35 million market to tap into. After this, MYEG plans to expand the service to new car registration and introduce an online registration number bidding system.

Immigration services will be another major driver of growth going forward. Launched in April 2010, the service involves the online renewal of foreign workers' permits. Initially the service only covered domestic maids but in Feb 2013 MYEG extended it to cover all types of foreign workers.

The impact of this expanded service should be felt in the coming quarters (2Q2013) but more noticeably in FY2014. The potential market size is around four million foreign workers' permits per year making this a potential rm200 million business.

As for the customs tax monitory service, MYEG has already completed the pilot project and is now (March 2013) awaiting the government's response. The scheme will initially focus on category C and D businesses, restaurant and entertainment outlets. The potential market is large. The service tax base is around rm4 billion which is evenly split between category C and D businesses on one hand, and professional services plus gaming on the other.

Under the customs tax monitoring scheme, MYEG has a 40% stake in a special vehicle that will link up point of sales terminals of businesses that are subject to customs' service taxes. The SPV will undertake the programme and install a software at each POS terminal for the link up = at its own cost. In return, the SPV will receive a 20% share of the taxes that were previously under declared with 80% going to the government, with a base growth imputed.

This could boost earnings from FY2014 onwards, although capex is also high at rm100 million for Phase 1.

It is worth nothing that the customs tax monitoring service is compatible with a GST regime that is widely expected to be implemented at a later stage. This will give the company a potentially wider earnings base, if it is given the rights to administer the system.